Jan 14, 2011 04:32 PM

Price Control and Champing at a Monopoly Bit

It's been more than three years since China enacted an anti-monopoly law that's often mocked as a toothless tiger. Now, finally, this critical section of the nation's so-called economic constitution could be changing to give it a bite – if decision-makers will let it.

The National Development and Reform Commission recently announced two sets of regulations aimed at addressing price-fixing practices by monopolies, effective February 1. The rules unambiguously empower authorities to investigate and penalize firms engaged in price-fixing, underscoring the government's determination to improve the existing law.

In particular, the regulations' clear definition of market dominance will make it much easier for authorities to take action against monopolistic behavior.

The new rules are on the whole commendable. Yet they remain silent on a problem that's raised the most concern: administrative monopolies.

Of the 29 articles in the most important set of regulations, only one deals with administrative monopolies. This is Article 24 of the Anti Price-Fixing Regulations, which says any state office or government body found to have flouted the rules should be dealt with in accord with Article 51 of the anti-monopoly law.

Article 51, though, happens to be the most controversial and flawed item on the books. Under this provision, an agency guilty of monopolistic behavior is held accountable only at the discretion of "higher authorities," while the agency itself may suggest appropriate resolutions "in accord with the law."

Of course, no one really believes this kind of vague law concerning action by "higher authorities" can be effective. Hence, problems in the market caused by administrative monopolies are unlikely to be resolved.

Ever since the anti-monopoly law was implemented August 1, 2008, many consumers have complained to legal authorities about alleged price-fixing behavior by oil companies, electricity suppliers and similar firms. But to date, their efforts have proven fruitless because the law is simply too vague about regulating administrative monopolies.

Hopes ran high among those who expected the government to fine-tune the law and plug loopholes through its operational guidelines, thus bringing administrative monopolies under the purview of enforcement authorities. That the latest regulatory moves have failed to address this problem is disappointing. It's an omission that reflects a lack of understanding among decision-makers.

Champions of administrative monopolies often argue that some trades and industries, particularly energy firms and public utilities, are exceptional. They say monopolies in these industries are "natural."

Back when the new regulations were introduced, officials said the main targets would be market- and some government-controlled prices. Prices for daily necessities such as water, electricity, natural gas and petroleum products were deemed outside the scope of supervision.

Supporters of limited monopolistic behavior also pointed to the government's legal responsibility to set prices for important public services and utilities, as well as for industries that favor "natural monopolies."

In a competitive market, a natural monopoly is created in response to complex interactions concerning resource allocation. But in China, there is little natural about a natural monopoly: Each entity is largely a result of central planning.

Even in industries truly conducive to natural monopolies, a company can take on characteristics of an administrative monopoly. In other words, even when dealing with a truly natural monopoly, we have to determine which practices are tied to market conditions and which are driven by government policies.

Moreover, by claiming a need to set prices, the government implies that it acts to protect society and the market by preventing exorbitant overpricing. But on the mainland, there is no clear separation between government and market. As owner and operator, the government directly or indirectly takes on all aspects of management and price-setting, and often ends up doing too much or too little. And sometimes it's just plain wrong.

For historical reasons, government departments and administrative monopolies have deep and complex ties. Therefore, the argument for making exceptions for "natural monopolies" on the mainland only makes it easier for an administrative monopoly to escape the law's purview.

With a strong government hand in price-setting for administrative monopolies, public hearings on pricing become mere formalities. Since the statutory function of a price hearing is to prove the "necessity and feasibility" for the government to set prices, the outcome of any hearing is known even before it's held. Worse still, both officials and citizens attending a hearing are normally chosen by relevant government departments. And hearings are held behind closed doors.

From start to finish, consumers are the weaker party, with little voice of their own. It's no surprise, then, that some mock these hearings. They've even popularized an expression: "Where there's a hearing, there will be a price increase."

With China's inflation rate rising, more people expect the government to rein in price-fixing and protect consumer rights. They detest the ills of state monopolies. But the latest regulatory changes failed to put administrative monopolies within reach of the law.

The government must now account for this oversight. In addressing price-setting by administrative monopolies, the government must admit to the adverse consequences of the practice. Drastic measures are needed to break up long-running monopolies.
In the short run, the government should impose price ceilings for monopolistic industries, with reference to experiences in developed countries such as the United States and Britain, and end the current "cost-plus pricing" practice as a means to contain administrative monopoly costs.

Can the problems of administrative monopolies be resolved? That will depend on whether decision-makers are determined to carry out resource and public utility price system reform. And the key to this determination is legal reform.

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